Yahoo Finance Coursera, Inc. (NYSE:COUR) Q1 2024 Earnings Call Transcript
Coursera, Inc. (NYSE:COUR) Q1 2024 Earnings Call Transcript April 29, 2024
Coursera, Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $0.01. Coursera, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Coursera's First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers prepared remarks, there will be a question-and-answer session. [Operator Instructions] I'd like to turn it over to Cam Carey, Head of Investor Relations. Mr. Carey, you may begin.
Cam Carey: Hi, everyone, and thank you for joining our Q1 2024 earnings conference call. With me today is Jeff Maggioncalda, Coursera's Chief Executive Officer; and Ken Hahn, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our press release, including financial tables was issued after market close and is posted on our Investor Relations website located at investor.coursera.com where this call is being simultaneously webcast and where versions of our prepared remarks and supplemental slides are available. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today's press release and supplemental presentation, which are distributed and available to the public through our Investor Relations website.
Please note, all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. These forward-looking statements include, but not limited to, statements regarding the potential impact trends affecting our industry and business, and factors affecting the same, the benefits and impact of our strategic assets and platform advantages, including our AI and machine learning initiatives and offerings, our ecosystem platform content and partner relationships, our anticipated plans and the anticipated advantages and benefits thereof, our strategy and priorities, our share repurchase program and cash and capital allocation and our vision, business model, mission, opportunities, outlook, financial business and otherwise and future intentions.
Actual results and events could differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties, including those discussed in our press release, SEC filings and supplemental materials. These forward-looking statements are not guarantees of future performance or plans, and investors should not place undue reliance on them. We assume no obligation to update our forward-looking statements, except as required by law. And with that, I'd like to turn it over to Jeff.
Jeff Maggioncalda: Thanks, Cam, and welcome, everyone. It's great to be with you all. In Q1, we continue to make progress across our business as we navigate a dynamic environment and evolving education landscape. We welcome nearly 7 million new learners. We expanded our catalog offerings with new professional certificates, pathway degrees and generative AI content. We made significant progress on getting our latest AI-powered product innovations into the hands of our learners and enterprise customers. And we grew revenue 15% over the prior year period, while generating more than $8 million in adjusted EBITDA and $18 million of free cash flow. Our first quarter revenue was lighter than we anticipated. We are seeing softness in our North American paid learners, which have an outsized impact on our in-quarter and future performance given their higher monetization rates.
Ken will discuss the dynamics in more detail as well as the implications on our outlook for the year. That said, our focus on branded, job rolling credentials continues to resonate with the individuals and institutions that we serve. And I continue to see signs that the ecosystem that we've assembled is learners, universities, educator businesses and governments all around the world, have put Coursera in the right position to help solve the fast-changing demands of the labor market and education system. So let me start with an update on how we see these global trends evolving. The first trend is digital transformation. For many years, the combined forces of technology and globalization have accelerated the transformation of nearly every institution in our society.
It's been more than a year since the remarkable capabilities of generative AI mesmerized the world. Early concerns about this technology reflected challenges the world experienced in 2020 and including its potential to disrupt local economies and educational systems, displace millions of workers and demand new types of skills that risk further widening the digital divide. We believe that the lasting impact of the pandemic was an accelerated pace of change across every facet of society. But unlike the pandemic, we've served as a catalyst to force digital adoption overnight, we remain in the early stages of understanding how generative AI will reshape the way we live, learn and work. Research by the University of Pennsylvania estimates that up to half of all tasks, for half of all job roles could eventually be automated.
But today, I believe that the vast majority of organizations are only experimenting with the technology and are generally overwhelmed and paralyzed by what they see coming and how to respond to it. Companies, universities and governments are looking for mission-critical use cases and best practices to emerge that correctly balance the risks with the opportunities of generative AI. We believe the key to navigating this conundrum lies in high-quality education and training, talent agility and effective change management, enabling companies to adopt generative AI both quickly and safely. Coursera itself has been navigating this generative AI conundrum, and I'm excited to share that earlier this month, Harvard Business School released a case study titled, " Courseraʼs Foray into GenAI" illustrating how Coursera responded to the opportunities and threats created by generative AI.
To our knowledge, this is the first case study of its kind by a top global academic institution, and it sets Coursera as a top leader and introduces higher education to the generative AI capabilities that Coursera is now offering. We believe that market pressures will eventually force institutions to take action or face the risk of being left behind. But leaders today are still grappling with how to make the leap from experimentation to implementation. Access to affordable, relevant and high-quality education and training will help ensure that global talent has equal access to the skills, credentials and job opportunities that they need to stay relevant and compete in our fast-changing world. This brings me to the second major trend, which is skill development.
Accenture, a longtime industry partner and customer, published a report in January on generative AI's impact on the workforce. Surveying thousands of CxOs and more than 5,000 employees. The report identifies a gap between leaders and employees that can help us understand barriers to workforce transformation that are facing companies this year. 86 percent of CxOs are using generative AI to some degree in their own work and nearly all believe that generative AI will be transformative for their company and industry. However, only one in three leaders believe that they have the technology expertise or feel that they can tell a compelling transformation narrative to lead the change that's required. As for the employees, 95% see value in working with generative AI.
94% said they are ready to learn new skills and their top concern is that they don't trust organizations to ensure positive outcomes for everyone, which is reinforced by the report finding that only 5% of organizations are actively reskilling their workforce at scale at this moment. If organizations are going to succeed at moving from experimentation to implementation, and unlocking the potential of these emerging technologies, we believe that must start with unlocking the potential of their talent. And this leads me to the third trend driving our business, the transformation of higher education. Two weeks ago, I was honored to join ASU+GSV in San Diego, alongside some of Coursera's closest partners. Coursera's Director and President of the American Capital Education, or ACE, Ted Mitchell; Founder of Grow with Google, Lisa Gevelber; and Chancellor of the University of Texas System, J.B. Milliken.
As you may recall, last year, we announced a statewide partnership with the University of Texas System and at this year's conference, I have the pleasure of joining the UT System Chancellor Milliken on stage to discuss our progress. We talked about the strategy behind our system-wide micro-credential program. the value of professional certificates for universities, students and employers and the need for more flexible pathways for the system to serve diverse and growing populations. The main questions that kept coming up in the conversations was how? How does the collaboration between UT, Coursera and industry partners like Google work? How do students use these industry micro-credentials to earn college credit towards a degree? And how can other universities implement a similar model air city, state or country.
I'm pleased to share that as of the spring term, every UT campus has launched Coursera's Career Academy, and the majority of campuses now have curriculum integration for credit, including El Paso, Permian Basin, Rio Grande Valley, San Antonio and Tyler. As of March, over 7,000 students have spent more than 100,000 hours learning online, and they've earned over 16,000 core certificates from Google, Microsoft, IBM and others. It's a testament to both student demand and the power of university and industry collaboration to deliver solutions that are aligned with the labor market needs of region. We believe our partnership with the University of Texas System is a replicable blueprint for the transformation of higher education and is only possible due to several leading capabilities and strategic assets that are unique to the Coursera platform, including our leading educator partners who create trusted high-quality content and credentials that organizations like ACE increasingly recommend for credit recognition.
Our global reach to individuals and institutions including our ability to facilitate collaboration by serving businesses, government and campuses as well as the data, technology and gen AI-powered product innovation we are investing in across our platform. Now let me share some of the recent progress that we've made on each of these advantages. First, let's discuss our educator partners. More than 325 of the world's leading universities and industry experts power our content engine. Recently, we were proud to welcome several new partners, including the University of Huddersfield as well as OLAY, Workday and The Recording Academy. Today, I'd like to provide updates on three critical areas of our catalog. certificates, degrees and generative AI content, starting with our entry-level professional certificates.
Unilever, one of the world's leading suppliers of beauty, home and personal care products has joined our partner community and launched two data analyst entry-level professional certificates. These certificates are designed to qualify learners with no college degree or prior experience for an analyst role in areas like inventory, logistics, demand planning as well as data marketing analyst roles in SEO, content marketing and CRM. This is what we refer to as a career pathway. But increasingly, learner completing certificates on Coursera are not choosing between a job or a degree, a certificate can provide the opportunity to unlock both a job and a degree. A key enabler of our credit recognition initiative and our pathway degree strategy is our growing partnerships with organizations like the American Council on Education.
We believe this is the start of a long-term trend in higher education, where industry micro credentials play a more critical role in how learners acquired their first job or earning credit towards the college degree. In-house campuses like the UT system, modernized their curriculum to create employable graduates to fuel the local economy and how governments deploy job relevant workforce training at scale and also in how businesses, reskill and read of talent. Now on to my second catalog update, which is the college degree. We recently announced a pathway degree program from the University of Huddersfield’s, a Master’s in Management with performance-based admissions pathways to promote flexibility and accessibility. All learners regard prior attainment or educational background are eligible to attempt to first module on Coursera and our open content catalyst.
Successful completion of this introductory module gains them admissions to the full degree program. And for my final catalog update, I'm excited to share the momentum we're seeing in rapidly expanding generative AI content and credentials on Coursera. In an era where machines are increasingly capable of producing content at scale without guardrails for quality, integrity or accuracy, we believe that individuals will increasingly turn to quality content from trusted institutions when looking to learn skills and earn credentials. Last week, Google launched the AI Essentials course, which, in addition to teaching foundational comps shows learners how to use AI as a collaboration tool in their day-to-day work. The introductory course is top by Google AI experts who are working to make this new technology accessible and helpful for everyone.
Google's latest course is one of more than 75 new courses and projects in generative AI that our partners have launched through the start of the year. This includes a growing number of top research universities and companies at the forefront of AI including DeepLearning.AI, Duke University, Google Cloud, IBM, Microsoft, Vanderbilt University and more to come in the future. That completes my catalog update. So, let's move to our second advantage, the global reach of our platform. For institutions, we have grown our paid enterprise customers to 1,480 and with recent additions across each of our verticals. As I highlighted before, we added nearly 7 million new registered learners growing our global learner base to 148 million by the end of March.
Growth continues to be broad-based with the fastest year-over-year increase coming from learners in our Asia Pacific region. To better serve our expanding set of learners and institutions around the world, we rapidly introduce new value through generative AI-powered innovation. And this leads me to our third advantage the ongoing product innovation occurring across our platform. My first product update is Coursera Course Builder. In many organizations, human resources and leadership and development teams are tasked with keeping employees informed, prepared and skilled. We believe this will include creating, updating and deploying learning resources that empower their workforce to keep pace with an increasing rate of change. It's why we launched Course Builder, an AI-assisted offering tool that enables any business, government or campus customer, to easily and quickly produce high-quality custom private courses at scale.
Based on a few simple inputs from an offer, the tool auto generates course content, including outlines, descriptions and learning objectives, dramatically reducing the time and cost of content production without sacrificing quality. Then Coursera can seamlessly blend modules of courses on Coursera, from participating world-class industry and academic partners with content from their own experts in their own organization. For example, private and public sector employers can quickly create and launch organization-specific courses tailored to their unique needs. Leadership and development teams can combine content from our industry and academic experts with relevant business context and internal expertise. And higher education institutions can leverage time-saving offering tools to empower faculty to create custom courses and keep learning resources relevant and up to date at the speed and scale that students and players now expect.
Like adding guest lectures or current events to their own university courses. Next, I'd like to provide an update on our AI-powered translation initiative, which we recently expanded from 18 to 21 languages. Adding support for learners speaking Hindi, Japanese and Korean. As a reminder, in 2023, we started translating our catalog of thousands of courses, certificates and specializations into local languages for our learners around the world. To date, more than 1 million learners have already accessed AI translated content in their enrolled courses and 90 million registered learners on our platform are based in countries primary language is one of our 21 sorted translated languages. Learner feedback has been inspiring, but we've also heard from our enterprise customers, including businesses and governments who have large multinational populations who can now have equal access to the world's top experts no matter what local language they speak.
And finally, an update on Coursera Coach. In Q1, we broadened access to the Coursera Coach beta program for paying consumer learners as well as for our Coursera for Business and Coursera for Government customers. Coach usage has increased 150% since our initial beta release, and I wanted to share some initial feedback from early learners. Our research revealed that many learners come to Coursera lacking the skills to learn effectively without a tutor. When we talk to them, these learners said that they talked to coach like a tutor, asking for summaries, explanations, quiz practice and even career advice. Rather than spending our searching for answers to the questions on external sites or creating them from scratch, Coach has freed up their time for actual learning.
Using Coach fundamentally improved the quality of their learning, becoming an essential part of their course experience, much like the videos and assessments already in the courses. In every example of our generative AI-powered product innovation, we had a clear strategy that focused on enhancing the value of the Coursera's experience through the unique assets of our platform, the content that we have, the data we have and the scale that we've had. And we've designed these generative AI products with the support for multiple large language models so that our learners, educators and customers will get to experience a rapid advancement in future models. To wrap up my opening remarks, I'd like to share a leadership update. In 2022, we implemented a new organizational structure, including roles or a Chief Revenue Officer and Chief Operating Officer; that has not delivered the growth that we need in our large but early markets.
After careful consideration, I've decided to flatten our leadership team structure, elevating our three segment General Managers and creating Chief Technology Officer and Chief Product Officer roles that will all report directly to me. This change is designed to enable our next chapter of growth, innovation and leverage, all in support of our long-term strategy. Before I turn it over to Ken, let me remind you of the key priorities we are focused on in the year ahead. First, we are broadening our catalog of entry-level professional certificates including new partners, roles, languages and credit recommendations to support degree pathways and campus integrations. Second, we're sourcing and launching new degree programs with a focus on flexibility, affordability and scaled pathways that our open content and industry micro credentials can count as credit towards college degrees.
Third, we're focusing on growing our enterprise segment across business, government and campus customers, supporting institutional collaboration to serve learner's needs in this fast-changing environment. And fourth, we're deepening our platform advantages, including the broad application of generative AI for translation, personalized learning with Coach and content creation and course building with course builder. All while driving more scale and leverage over time. I'd like to now turn it over to Ken. Ken, please go ahead.
Ken Hahn: Thank you, Jeff, and good afternoon, everyone. As Jeff mentioned earlier, we are pleased with our strategic progress on a number of key initiatives. But I want to begin my remarks today by making it clear that we are not satisfied with our revenue growth. In particular, our revised outlook for 2024 revenue. In the first quarter, we generated total revenue of $169.1 million, which was up 15% from a year ago. Growth was driven by double-digit increases across all three of our segments, but we underperformed in consumer, more in that momentarily. Please note that for the remainder of the call, as I review our business performance and outlook, I'll discuss our non-GAAP financial measures unless otherwise noted. For the first quarter, gross profit was $91.7 million and a 54% gross margin, in line with the prior year period.
Total operating expense was $88.2 million or 52% of revenue, down 10 percentage points from the prior year period. For the individual line-item components of OpEx, sales and marketing expense represented 29% of total revenue, down one point. Research and development expense was 13% of revenue, down seven points. And general and administrative expense was 10% of revenue, down two points. I remain pleased by our ability to balance our growth initiatives and long-term investments while demonstrating the leverage inherent in our model as our platform scales. Q1 net income was $11.9 million or 7% of revenue, and adjusted EBITDA was $8.3 million or 4.9% of revenue. As a reminder, we do not optimize EBITDA performance in any single quarter. Rather, we set an annual EBITDA margin target and work within that plan based on the trajectory of the business.
Most importantly, Q1's bottom line performance marked a strong start to the year as we continue to manage to our 2024 adjusted EBITDA margin target of approximately 4%. So, while we needed to bring down top line guidance, our targeted adjusted EBITDA margin remains unchanged. Now let's discuss cash performance and the balance sheet. We generated strong free cash flow of approximately $18 million, which I'll remind you is inclusive of more than $2 million in purchases of content assets which we now treat similarly to other categories of capital expenditures, effectively lowering our free cash flow computation. And the progress update on our share repurchase program. In Q1, we repurchased approximately 400,000 shares of our common stock for approximately $6 million.
And in April, we bought back an additional 1.1 million shares common stock for approximately $16 million. This leaves nearly $15 million remaining under a total repurchase authorization amount of $95 million, which we expect to complete in the current quarter price dependent. We ended the quarter with approximately $725 million of unrestricted cash and cash equivalents with no debt. We believe that our strong financial position is an asset that provides resilience and strategic optionality, which we believe is particularly valuable during a period of rapid technical -- change in the evolving education landscape. Next, let's discuss the performance of our segments in more detail. Consumer revenue was $96.7 million, up 18% from the prior year.
Segment gross profit was $51.8 million or 54% of consumer revenue, in line with the prior year period. And our top of funnel activity remained robust with approximately 7 million new registered learners this quarter. With that being said, our consumer revenue was softer than anticipated. In particular, we underperformed in our North American region, where we are experiencing a lower volume and conversion of paid learners compounded by the delay of the key content launch from one of our educator partners as compared to the timing in our financial plan. While that launch has now occurred, we'll continue to face a future headwind on our consumer growth as our first quarter cohort of learners includes a substantial shortfall in high LTV North American paid learners.
We are actively pursuing opportunities to mitigate the impact on our full year results, including the acceleration of other content launches planned throughout the year, but as I'll discuss shortly in our revised guidance, we do anticipate a negative impact in both the second quarter and full year outlook. Now let's move to Enterprise. Enterprise revenue was $57.5 million, up 10% from a year ago, driven by our government and campus verticals. Segment gross profit was $39.1 million or 68% of enterprise revenue compared to 67% a year ago. The total number of paid enterprise customers increased to 1,480, up 18% from a year ago. And our net retention rate for paid enterprise customers was 94%. As we discussed in the past quarters, we continue to see a divergence in performance across our verticals, specifically pressuring Coursera for Business, offset by momentum in our other two verticals, government and campus.
While corporate learning budgets remain under pressure, we are leaning into the momentum in our government and campus opportunities where our unique capabilities, including branded high-quality content, entry-level job role training and credit recommendations are particularly well suited for these customer use cases. And finally, our degree segment. The degree segment revenue was $14.8 million, up 10% from a year ago on growth in new students and scaling of recent program launches. The total number of degree students grew 23% from a year ago to 22,200. As a reminder, there is no content costs attributable to the degree segment. So, the degree segment gross margin was 100% of revenue. And while this segment is a small portion of our overall revenue mix today, we remain focused on the long-term opportunity in degrees.
We believe that our platform is uniquely positioned to fundamentally transform the college degree. We need to start validating that potential with renewed and increasing growth. We believe that the path to better degrees growth lies in working with our university partners to create stronger pathways between our consumer segment where we benefit from scale and the growing selection of pathway degree programs. Now on our financial outlook, taking into account the dynamics I outlined in the discussion of our consumer results. For Q2, we're expecting revenue to be in the range of $162 million to $166 million. For adjusted EBITDA, we're expecting a range of negative $2 million to positive $2 million. For full year 2024, we now anticipate revenue to be in the range of $695 million to $705 million.
With the revised total revenue outlook, we thought it would be helpful to provide new growth expectations by segment for 2024 to reflect earliest view. We now expect all segments to grow at approximately 10% for the full year. For adjusted EBITDA, we're expecting a range of $24 million to $28 million, maintaining our adjusted EBITDA margin annual target of approximately 4%. Consistent with our messaging over the past several years, we are committed to adjusting the pacing of investments based on the trajectory of the business to ensure we manage to the annual adjusted EBITDA margin target we set at the beginning of the year. So to summarize, we're not satisfied with our revenue trajectory for Q2 and the full year. This year's revised guidance is not what we consider a successful growth company metrics.
And we've taken actions that we believe will better position ourselves for future growth opportunities. We are committed to producing growth with consistently increasing scale and leverage with a strong track record of delivering on that promise. And we are pursuing our long-term strategy from a position of financial strength, allowing us the resilience and the strategic flexibility to navigate and drive the transformation of higher education currently underway. I'll now turn the call back to Jeff for closing comments.
Jeff Maggioncalda: Thanks, Ken. I'd like to close today with a special use case. Earlier this month, I joined the World Bank in D.C. to speak to Ministers of finance from emerging economies. 20 of the 30 countries represented in that room had partnered with Coursera during our COVID response initiatives many through our work with the Commonwealth of Learning. One of the countries served by this program was Guyana, whose Ministry of Education used Coursera to train more than 36,000 Guyanese citizens with more than 190,000 course enrollments during COVID. Last month, I joined the President of Guyana and many of his ministers to launch a national training initiative that offers every Guyanese citizen and public sector employee access to Coursera.
The national program will be delivered through various ministries across the country with customized learning programs for each sector. For example, the office of the Prime Minister is using Coursera to skill public servants in digital media, communication and journalism. The Ministry of Human Services and Self-Security is using Coursera to train over 4,000 women in entrepreneurship, digital finance and resilient skills. The Ministry of Health assembled at the event 900 nursing students and 800 nursing assistant students who are part of the nursing school program now moving online on Coursera. And the Ministry of Tourism, industry and commerce is working with Coursera to enhance their staff’s skills in digital marketing, communication and data analytics for hospitality and travel.
Similar to our partnership with the University of Texas System, this use case with Guyana provides a powerful example for other institutions who are looking to provide high-quality education and skills training opportunities to large populations that otherwise wouldn't have access to help citizens and local businesses unlock their full economic potential to address skilled labor shortages in high-demand industries and to diversify and drive economic growth in a fast-changing global market. Generative AI acts as both a disruptor and an enabler. Whether it widens or narrows the opportunity gap hinges on our ability to make education and skilling equally accessible on a global scale. Businesses, governments and academic institutions, we'll have to work together to mitigate the human cost of AI disruption and create more equal opportunities for everyone in a world of accelerating change.
We are proud of Coursera's role and especially our partners we work with who are turning the threat into an opportunity because of education. Now let's open up the call for questions. Thank you.
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